46 Pages Posted: 20 Mar 2011 Last revised: 24 Dec 2011
Date Written: December 2011
We show that the stock market downturns of 2000-2002 and 2007-2009 have very different proximate causes. The early 2000’s saw a large increase in the discount rates applied to profits by rational investors, while the late 2000’s saw a decrease in rational expectations of future profits. We reach these conclusions using a VAR model of aggregate stock returns and valuations, estimated both freely and imposing the cross-sectional restrictions of the ICAPM. Our findings imply that the 2007-2009 downturn was particularly serious for rational long-term investors, whose losses were not offset by improving stock return forecasts as in the previous recession.
JEL Classification: G12, N22
Suggested Citation: Suggested Citation
Campbell, John Y. and Giglio, Stefano and Polk, Christopher, Hard Times (December 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787000 or http://dx.doi.org/10.2139/ssrn.1787000